As you approach retirement, it's time to start touching the untouchable -- your retirement plan -- as you will be required by law to begin withdrawing from your plan or plans.
How and when you start taking your distributions can be tricky, and the wrong move can diminish your retirement assets.
To make sure you get the most out of your retirement plan, here are four options to keep in mind:
Taking Your Lump
If you have a retirement plan such as a 401(k), SEP, Keogh, SIMPLE or a traditional IRA, you must begin taking regular distributions, generally by April 1 of the year after the year you turn 70½. This is determined by the
Uniform Lifetime Table that can be found on the IRS Web site. This chart is based on how much longer the IRS expects you to live, and determines how much you need to withdraw.
Technically, these distributions aren't required, but if you don't adhere to them you will be slapped with a whopping 50% tax penalty on the amount you were supposed to take out. So unless you want to give away half of your retirement nest-egg to the IRS, it's important to make sure you take your required minimum distributions (RMDs).
When you finally touch your retirement money you may be inclined, like many lottery winners, to take the money all at once in a lump sum. This is useful if you have plans for a big-ticket purchase when you retire, such as a new home or boat. It also may be a good idea for those in poor health. But, it's not a good idea to take a lump sum if you don't need the money right away.
It's important to remember that when you take a distribution in the form of a lump sum, it is taxable as ordinary income.
However, if you own company stock in your retirement account, you may be able to qualify for net unrealized appreciation (NUA) gains, which can mean a lower tax burden for you. Talk to your tax adviser to find out whether you qualify.
Partial Withdrawals
If you don't need to take all your money out at once, but can't afford to leave it all invested by rolling it over, you can choose to take a partial withdrawal. A partial withdrawal can be made while you are still working or when you are retired. Because it is partial, the amount not withdrawn continues to enjoy its tax-advantaged status.
Roll With It
If you don't need to tap into your retirement savings by the time you're required to begin making withdrawals, you can keep your assets growing by rolling them over into another account.
You can roll over your 401(k) plan into an IRA, and you can roll your traditional IRA into a Roth IRA (if your modified adjusted gross income is under $100,000). By rolling your 401(k) into an IRA, not only will your assets continue to accumulate, but you will likely have more investment choices.
Michael Katz
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